Expanding Economic Freedom

Expanding Economic Freedom

Why do some countries prosper while others do not? It's a question
as old as Adam Smith's "The Wealth of Nations," and it's what we at
The Heritage Foundation and The Wall Street Journal try to answer
every year in the "Index of Economic Freedom," a country-by-country
survey of economic freedom around the world.

The central finding of the Index is clear: Countries with the
most economic freedom have higher rates of long-term economic
growth and more prosperity than those with less economic freedom.
By that measure, the 2000 edition of the Index contains good news:
More countries expanded economic freedom during the past year (57)
than curtailed it (34).

While countries that restrict economic liberty still outnumber
those that allow it, governments in almost every region of the
world have enacted policies that give their citizens a higher level
of economic freedom and, over the long term, higher economic
growth.

Perhaps surprisingly, the United States does not have the
world's freest economy. We come in fourth place, behind Hong Kong,
Singapore and New Zealand. Although it is now back under the
control of Mainland China, Hong Kong -- with its non-existent trade
barriers, strong protection of property rights, and 17 percent top
marginal income tax rate -- is a model of economic freedom.

Other countries one would expect to do well on the Index because
they have a track record of prosperity -- such as Germany, France
and Sweden -- are actually further down the list. These countries
will pay a price for imposing restrictions on economic freedom.
Indeed, there is some evidence they already have, as unemployment
rates in much of Western Europe hover above 10 percent.

The exceptions in Western Europe are Great Britain and Ireland,
which are two of only 10 countries with economies rated "free" on
the Index. This underscores another finding of the Index: that
countries operating under a strong tradition of Anglo-American
capitalism, with its emphasis on a well-functioning legal system
and secure property rights, tend to outperform countries with
electoral freedom but no "rule of law." Luxembourg and Switzerland,
while not part of the Anglo-Saxon world per se, still hew to the
Anglo model.

"People ... tend to undertake hard work and investments only if
they have a reasonable probability of enjoying the fruits of their
efforts," Harvard economics professor Robert Barro writes in the
2000 Index. "Thus, if property rights are insecure ... people tend
to work less and invest little." Which explains why countries with
British roots, such as the United States, Canada and Australia,
tend to rank high, while Russia and most former Soviet states rank
low.

Although several former communist countries improved last year
-- led by Estonia, in 22nd place globally -- nearly all are rated
"mostly unfree." Many have instituted capitalist reforms since the
Cold War, but lacking economic freedom and the rule of law, they
struggle with high levels of corruption. Free elections alone will
do little to erase the effects of seven decades of central
planning.

For years, U.S. foreign policy has promoted democracy around the
globe as the best way to ensure economic prosperity. But according
to Barro, a country's form of government is not the overriding
factor for economic freedom that many U.S. officials assume it to
be. Otherwise, a democracy such as Russia would rank higher than
122nd, and a monarchy such as Bahrain would rank lower than
fourth.

The Index also demonstrates that low inflation can play a
critical role in creating economic growth. This is certainly the
case in Latin America, where more than a dozen countries from
Mexico to Chile have expanded economic freedom for the third year
in a row, again making this region the world's "most improved."
Lower inflation helped El Salvador, the "Hong Kong of Latin
America," tie with Chile for 11th place globally. Argentina, where
inflation dropped from 3,000 percent in 1989 to less than 1 percent
in 1998, is 17th. Brazil (110th) and Venezuela (94th) are crippled
by inflation rates topping 45 percent.

Although Mexico saw its Index score rise in 1999, it remains
"mostly unfree." Trade with its NAFTA partners has increased, but
Mexico raised tariff rates last year and suffers from high levels
of official corruption. As trade between the United States and
Latin America climbs over the next several years, Mexico might find
itself more of an obstacle than a conduit to the free flow of
trade.

The Index proves that economic growth is no accident but the
result of economic freedom. Without it, no country can bridge the
gap from poverty to prosperity.

Gerald P. O'Driscoll, a former Federal Reserve vice
president and co-editor of the 2000 "Index of Economic Freedom," is
a senior fellow in economic policy at The Heritage Foundation.
Copies of the Index can be ordered by calling 1-800-975-8625.